Sunday, July 20, 2008

Keeping a good risk to reward ratio

Keeping a good risk to reward ratio is critical to the success of a stock market trader. This is something that most new traders will ignore.

In fact there are people who will take a trade that offers them a $2 risk in order to make a $1 reward. The main reason for this is that new traders do not expect to be wrong. They believe that it is possible to be right all if not most of the time when trading.

This thinking is more of a daydreaming philosophy. Anyone who is serious about stock market trading should remember that no matter how much homework you do on a stock you will always have trades that make you money, and trades that lose you money.

The way someone becomes good in the stock market is by managing their risk and only taking trades in which they can control the amount they can lose.

So what is a good risk to reward ratio? Well, that depends on what system you trade. Many swing traders who make big speculations will only take trades with a $2 reward for a $1 risk.

This philosophy is definitely common but it is not the only one. Options sellers who have a larger risk to reward but a greater probability of success feel different. It is impossible to find a trade that offers a 2/1 risk reward if you are an option seller.

But options sellers also have to manage their risk. It is generally a good rule for an option seller to exit there trade if they lose any more than $1.5 of the premium they make.

Trend traders also have a differently philosophy about risk to reward ratios. They may take trades in which you have an infinite reward for a given risk. That is simply because there is no target when trend trading.

To find out more about trading in the stock market visit

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